5. planning audit procedures

non current assets

these are assets held for continuing use in the business

What is an important test when reviewing non-current assets?

Ensuring that only capital expenditure is included on the statement of financial position.

What are the relevant assertions for assets and liabilities in auditing?

• Existence

• Completeness

• Rights and obligations (or ownership)

• Valuation

• Disclosure (or description)

What is a lease according to IFRS 16?

A contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration.

What does IFRS 16 require regarding lease recognition in the lessee’s statement of financial position?

Recognition of all leases except short-term leases and leases where the asset is of low value.

What qualifies as a short-term lease under IFRS 16?

lease with a term of 12 months or less.

What are the main audit risks for leases under IFRS 16?

• Recognition of a right-of-use asset when it does not qualify

• Non-recognition of a leased asset that should be classified as a right-of-use asset

• Material misstatement in the accounting treatment (e.g., depreciation or lease liabilities)

• Incorrect classification between current and non-current lease liabilities

inventory

sub-classified as raw material, work in progress or unfinished goods

What are the three main elements of inventory balances in the statement of financial position?

Quantity, valuation, and disclosure.

Which audit assertion does attending the physical inventory count primarily support?

existence (and it also provides corroborative evidence for valuation).

What are the three methods for an entity to physically count its inventory?

• Year-end count – Entire inventory counted at period end for closing balance

• Interim count – Partial count during the year with reconciliation to year-end

• Continuous inventory records / perpetual inventory – Automated system with ongoing counts

is it the auditor’s responsibility to count the inventory?

No, the auditor verifies inventory counts, but management is responsible for keeping accurate records under the Companies Act 2006.

What two aspects of inventory are reviewed by auditors in addition to amounts?

presentation and disclosure

What is the relevant assertion when reviewing how inventory is presented and disclosed?

classification

What are two key inventory disclosure requirements according to IAS 2: para.9?

• Accounting policies for cost and NRV.

• Sub-classification as raw materials, WIP, and finished goods.

Why are raw materials usually held at cost?

Because it’s unlikely that NRV differs from cost unless damaged or aged.

How does accounting standards define 'cost' for WIP and finished goods?

As "cost of purchase plus the cost of conversion."

What do auditors test regarding the cost of conversion?

The company’s calculation of cost of conversion and the reasonableness of overhead allocations.

What should auditors ensure about obsolete or damaged goods in inventory?

That their value has been reduced in the inventory count.

What does a Goods Despatched Note (GDN) before year-end affect in financial statements?

• Revenue: ✓

• Receivables: ✓

• Inventory: ✗

What does a Goods Despatched Note (GDN) after year-end affect?

• Revenue: ✗

• Receivables: ✗

• Inventory: ✓

What does a Goods Received Note (GRN) before year-end affect?

• Purchases: ✓

• Payables: ✓

• Inventory: ✓

What does a Goods Received Note (GRN) after year-end affect?

• Purchases: ✗

• Payables: ✗

• Inventory: ✗

What are the two cut-off tests for revenue?

(a) Obtain the last GDN number at year-end
(b) Check GDNs before and after year-end to ensure revenue is recorded in the correct period

How are cut-off tests for purchases performed?

Same as for revenue, but using GRN and purchase invoices instead of GDN and sales invoices.

What is circularisation?

An audit technique where customers are contacted directly to confirm the amounts they owe to the audited entity.

What is circularisation mainly used to test?

Existence and rights & obligations of receivables (not valuation).

What steps are involved in circularisation?

1. Obtain a listing of trade receivables at year end.

2. Agree total to sales ledger control account.

3. Review listing for omissions/misstatements.

4. Select sample for positive confirmation (client letter, statement attached, replies sent directly to auditor).

5. Follow up by post if no response.

6. Follow up by email/phone if still no response.

7. Investigate disputed balances.

8. For non-replies, perform alternative procedures (e.g. check invoices, cash receipts, discuss with credit controller).

What is a typical response rate for circularisation?

Around 50% is often the best achievable.

Why does circularisation not test valuation?

Customers usually won’t confirm if balances are understated, and agreeing a debt is owed doesn’t mean it will be paid.

What is the audit objective of checking the listing of trade receivables and reconciling to the nominal ledger?

Completeness and existence.

How do auditors test cut-off for receivables?

Check despatches of goods around year-end to ensure they are recorded in the correct period.

What tests ensure all despatches are invoiced?

Verify that a sales invoice has been raised for all despatches during the year.

How do auditors test rights and obligations of receivables?

1. Trace a sample of receivables to cash received post year-end.

2. Review board minutes/management discussions to check for factoring of debts.

What tests help auditors assess valuation of receivables?

1. Review consistency and appropriateness of the bad debt provision policy.

2. Discuss overdue debts with officials using aged analysis.

3. Review relevant correspondence with customers.

What tests check proper disclosure of receivables?

1. Ensure debts written off were properly authorised.

2. Review allocation of after-date cash received.

3. Ensure receivables are categorised correctly as per Companies Act 2006 (trade receivables, other receivables, prepayments).

What does "Cash and bank" include?

All bank accounts held by the entity and any cash on site (petty cash, till floats).

What is a bank reconciliation?

A process to understand timing differences between the entity's cash book and the bank's records of the entity’s bank balance.

What is the key audit test for cash and bank?

Review of the entity’s bank reconciliation.

What audit tests check completeness and existence of cash and bank balances?

1. Obtain a listing of bank and cash balances and reconcile to the nominal ledger.

2. Review the bank confirmation letter for all accounts held.

3. Count petty cash balance.

4. Review cashbook for unusual items.

What audit tests check disclosure for cash and bank?

1. Review bank letter for any legal right of set-off.

2. Investigate if any accounts are secured over company assets.

How should standard bank letters be sent to banks by auditors?

In duplicate, on the auditor’s own notepaper, to every branch where the client has accounts or dealings since the last accounting period.

What must auditors ensure before sending a bank letter?

That the bank receives the client’s written authority to disclose information to the auditor.

What core information is requested in a standard bank letter?

1. Bank accounts and balances (including restrictions and closed accounts).

2. Details of set-off arrangements.

3. Loans, overdrafts, covenants, guarantees, indemnities (with terms and repayment frequency).

4. Securities charged over items above.

5. Other banks or branches where the client has relationships.

What supplementary information is requested in a bank letter?

1. Trade finance (bills discounted with recourse, guarantees, bonds, indemnities).

2. Other contingent liabilities.

3. Securities (as per Practice Note 16, Appendix 1).

What are borrowings?

Loans repayable more than one year after the year-end (e.g. bank loans, debentures).

What are the key audit objectives for borrowings?

1. Prepare a schedule of loans outstanding.

2. Compare opening balances to prior year.

3. Test clerical accuracy of the schedule.

4. Compare balances to the general ledger.

5. Check lender names to bank letter/debenture register.

6. Review minutes and cash book for unrecorded loans.

What audit procedures test valuation of borrowings?

1. Trace additions and repayments to the cash book.

2. Confirm repayments match the loan agreement.

3. Examine receipts for repayments.

4. Obtain direct confirmation from lenders of amounts and terms.

5. Verify interest charged and adequacy of accrued interest.

What audit procedures test disclosure of borrowings?

Review disclosures in the financial statements and ensure they meet legal requirements.

Why are payables important in the audit?

Although individual balances may be small, collectively they can be the largest credit balance on the statement of financial position.

What are the key audit objectives for payables?

Completeness, existence, valuation, and disclosure.

What is the main audit risk with payables?

Understatement, because companies may deliberately omit liabilities to make the financial position look stronger.

What is an accounting estimate?

An approximation of the amount of an item when precise measurement is not possible.

Give examples of accounting estimates.

• inventory and receivables allowances

• Depreciation charges

• Accrued revenue

• Lawsuit loss provisions

• Warranty provisions

When should a provision be recognised (IAS 37)?

1. There is a present obligation (legal or constructive).

2. A probable outflow of economic benefits is required to settle it.

3. The amount can be reliably estimated.

Who is responsible for making accounting estimates?

Directors and management.

Why is inherent risk higher for accounting estimates?

They involve uncertainty, significant judgement, and audit evidence is usually less conclusive.

How should formula-based estimates (e.g. provisions) be reviewed?

Regularly by management, comparing actual results to prior period estimates.

Why is payroll expense highly material to the financial statements?

It is usually a large expense, and payroll-related payables are significant.

What type of audit procedures are often used in payroll?

Analytical procedures (predictable relationships: staff numbers, pay rates, deductions ratios) and tests of detail.

What audit procedures test occurrence of payroll?

1. Check remuneration per payroll to personnel records.

2. Confirm employees exist (meet them).

3. Check benefits to supporting documentation.

What audit procedures test accuracy of payroll?

• Recalculate benefits.

• Check tax and NI deductions are correct.

• Check validity of other deductions (e.g. pension scheme).

What audit procedures test completeness of payroll?

• Trace employees from records to payroll.

• Check joiners are paid correctly and leavers removed.

• Check casts (totals) of payroll.

• Confirm bank transfer payments.

• Agree net pay per cash book to payroll.

• Investigate unusual items.

What are auditors concerned with when testing purchases?

Occurrence, measurement, validity, and cut-off.

What analytical procedures can auditors use for purchases?

• Compare monthly purchases to prior years.

• Assess effects of price or product changes.

• Compare trade payables/purchases ratio and trade payables/inventory ratio with prior years.

• Compare major expenses with previous years.

How do auditors test completeness and validity of purchases?
A:

• Trace source purchase documents to the general ledger (completeness).

• Test items from the nominal ledger back to purchase orders/requisitions (validity).

What are other payables or accruals?

Amounts recorded when an entity has received goods or services but has not yet paid (e.g. utilities bills).

What are the audit objectives for other payables/accruals?

Valuation, existence, and completeness.

How do auditors test other payables/accruals?

• Review subsequent payments to confirm existence and valuation.

• Verify calculations for reasonableness using supporting evidence (e.g. prior years, P&L review).

• Perform analytical procedures to identify missing accruals.

• Review post year-end payments and invoices to see if they should have been accrued.

How are PAYE and VAT accruals tested?

• PAYE: Compare with monthly payroll deductions.

• VAT: Check against the next VAT return.

What do auditors need to be able to explain regarding audit risk?

the areas of audit risk that could lead to material misstatements in the financial statements.

What types of audit procedures must auditors be able to produce for assessments?

Written procedures for key areas and assertions across the financial statements.

What are the key areas and assertions auditors need to know procedures for?

• Non-current assets – capitalisation, rights, leases

• Inventory – counts, WIP/finished goods tests, cut-off

• Receivables – circularisation and results analysis

• Cash and bank – bank letters and reconciliations

• Borrowings – loans and long-term liabilities

• Payables – trade and other payables

• Allowances – depreciation, impairments, doubtful debts

• Revenue – reconcile using double entry with receivables

• Payroll – verify with double entry and expense analysis

• Purchases & expenses – validity and completeness

• Accruals – amounts incurred but not yet paid

• Prepayments – amounts paid but not yet due

Why is double entry important in revenue and payroll testing?

it allows auditors to verify amounts recorded by comparing related accounts (e.g. receivables for revenue, cash book for payroll).

assertions for non-current assets

• completenes

• existence

• rights and obligations

• valuation

assertions for trade payables

completeness, existence, and obligations

assertions for payroll

occurrence, accuracy and completeness